PALMS HOSPITAL Traditional Project Analysis HCA 515 Fall 2014 Chetan Gujarathi Nihal Kabre Maria Khalid Krupali Joshi Marie-Dianne Sauco

Palms hospital case 250 bed, investor owned hospital located in Islamorada, Florida. Founded in 1946 by Rob Winslow a prominent Florida physician. Palms Hospital Management considering expansion into an outpatient surgery center - first mover advantage. Project risk analysis conducted: To avoid past failures To forecast inflation rates of healthcare industry, forecast costs and revenues

Palms hospital case ASC Procedures Source: Ambulatory Surgery Center Association

BACKGROUND of ASC PPACA - Strategic planning and financial management necessary for healthcare organizations to maintain stability Ambulatory Surgery Centers - Rise in trend and revenue ASC - Mostly physician owned , hospital owned with quality of care and cost savings

BACKGROUND of ASC Medicare Reimbursements - 58% of the amount paid to the hospitals for the same procedure CMS - strict quality regulations Main issues - Reimbursement, EMR implementation, Physician alignment, healthcare reform and consolidation

Ambulatory surgery centers First opened in 1970 2.5 million procedures in 1990 Have grown to 20 million by 2009 Medicare approval on new minimally invasive surgery techniques. Patient preferences Third party payers preference due to cost Rapid advancements in technology Laser, Laparoscopic, Endoscopic and Arthroscopic

Exhibit 1 Ownership Structure of ASCs Source: Ambulatory Surgery Center Association.

Exhibit 2 Comparison of ASC and Hospital Outpatient Department (HOPD) Payment Rate. Source: Ambulatory Surgery Center Association

Specific case issues Volatility of input variables: Number of procedures per day Average revenue per procedure Salvage value of building and equipment Inflation: highly variable Opportunity cost – loss of inpatient surgeries if outpatient surgery center is built. $1 million lost annual cash $500, 000 annual cash expenses Net = $500,000 revenue/ opportunity cost.

Analytical tools and methods Capital Budgeting Analysis Break-even Analysis Cash Flow Estimation Using Excel’s Goal Seek Function Risk Assessment Project’s Cost of Capital Sensitivity Analysis Return on Investment Analysis Scenario Analysis NPV IRR MIRR

results Sensitivity analysis

RESULTS RETURN ON INVESTMENT Year 1 2 3 4 5 Net Cash Flow ($10,200,000) $2,297,600 $2,822,528 $2,348,804 $2,116,468 $5,555,562 ROI Measure Value Net present value (NPV) $881,229 Internal rate of return (IRR) 12.9% Modified IRR (MIRR) 11.8% Payback 4.1

RESULTS BREAK-EVEN ANALYSIS Variable Break-Even Value Number of Procedures 18 Average Revenue per Procedure $927 Building Equipment Salvage Value $2,634,619

RESULTS SCENARIO ANALYSIS  Case  Probability Number of Procedures Average Revenue per Procedure Building/Equip Salvage Value  NPV Worst 20.0% 10 $800 $4,000,000 ($5,495,223.84) Most Likely 60.0% 20 1,000 5,000,000 $881,229.13 Best 25 1,200 6,000,000 $6,284,739.28 Total 100.0%   Expected NPV $686,640.56 Standard Deviation $3,732,767 Coefficient of Variation 5.4

Scenario analysis Contd.

RESULTS High risk project high cost of capital Variable Value Cost of Capital 14% NPV ($288,838) IRR (12.9%)

Discussion & limitations Attractive investment : Reimbursement rates equal to those of hospital Revenue per procedure being influential factor. Limited information : Of hospital’s current cash flow Inflation rate prediction Sensitivity analysis: limited Only considers uncertain variable separately and not interactions among the input variable Less information of the current cash flow and past failures Scenario analysis: limited Only 3 possible scenarios when there could be many possibilities Assumes definite relationship among variables combined to form best and worst case scenario

suggestions Scenario analysis reveals a negative NPV and CV much greater than the hospital’s average project’s CV we have to consider the expected NPV that considers all these changes at a higher cost of capital of 14%. If the management is willing to take the risk then they will go forward with the investment, but if they are risk averse they will not make the investment. With the recent history of failure of the Day Care project, the board may be highly cautious before making further investments. The local surgeons are considering physician owned facilities, therefore there is likely to be competition in the future.

Conclusion Due to high risk and low profitability, it is suggested that the board should NOT go ahead with the investment

References http://www.ascassociation.org/home Ambulatory Surgery Center Association (2014). Retrieved from http://www.ascassociation.org/home   Gapenski, L., & Pink, G. (2009). Palms Hospital: Traditional Project Analysis. In Cases in Health Care finance (pp. 143-148). Health Administration Press; Fourth Edition. Gapenski, L.C. & Pink, G.H. (2011). Understanding Healthcare Financial Management. Chicago, IL:  Health Administration Press (n.d.). Ambulatory Surgery Centers: A Positive Trend in Health Care. Retrieved from Ambulatory Surgery Center Association website: https://higherlogicdownload.s3.amazonaws.com/ASCACONNECT/142533d1- 73af-4211-9238-7f136c02de93/UploadedImages/About%20Us/ASCs%20- %20A%20Positive%20Trend%20in%20Health%20Care.pdf Pallardy, C., & Becker, S. (2013, July 30). 50 things to know about the ambulatory surgery center industry. Retrieved from Becker's ASC Review website: http://www.beckersasc.com/lists/50-things-to-know-about- the-ambulatory-surgery-center-industry.html